Understanding Dividends and the Upcoming Changes in the Irish Economy

by | Oct 25, 2023 | General

The rules surrounding dividends in the Irish economy are about to change, and it’s important to understand what’s in store. Alongside the 15% corporation tax rate set for the next year, there will be new rules to govern how companies distribute dividends. In this blog, we’ll break down these changes in plain and simple terms, focusing on the Irish economy.

What Are Dividends?

First, let’s get back to basics. Dividends are the profits that a company shares with its shareholders. When a company makes money, it can either reinvest it or distribute it to shareholders as dividends. Shareholders are the people who own a part of the company, and dividends are their share of the company’s profits.

New Dividend Rules

Starting next year, alongside the 15% corporation tax rate, there will be some important changes in how dividends are taxed and distributed.

  1. Tax at Source

The most significant change is that the Irish government will introduce a withholding tax on dividends. This means that when a company pays out dividends, it will have to withhold a portion of that money and send it directly to the Revenue. This withholding tax will be set at 15% to align with the new corporation tax rate.

  1. Reclaiming Tax

If you’re an individual shareholder receiving dividends, you can usually reclaim some or all of the withholding tax, depending on your personal tax situation. For example, if you’re a lower-rate taxpayer, you can reclaim some of the withholding tax to reduce your overall tax bill.

  1. Double Taxation Agreements

Ireland has agreements with many countries to avoid double taxation. This means if you receive dividends from a foreign company, you may be able to claim a credit for the tax you’ve already paid in that country.

  1. Tax Credits

Some shareholders, like pension funds and charities, may be eligible for special tax credits, which can reduce their overall tax liability.

Why These Changes?

The Irish government is making these changes to modernise the tax system and ensure that it remains competitive on the global stage. The 15% corporation tax rate is part of this effort to attract and retain businesses in Ireland. By introducing a withholding tax on dividends, the government aims to maintain a fair and efficient tax system.

What It Means for You

For individual investors, these changes mean that you might have a bit more paperwork to do when it comes to tax time. You’ll need to keep track of the dividends you receive and any withholding tax that’s been deducted. It’s a good idea to consult with a tax advisor to ensure you’re claiming the appropriate tax credits and deductions.

For businesses, this means adjusting your financial planning to account for the withholding tax on dividends. You’ll need to calculate and set aside the appropriate amount for tax when distributing dividends to shareholders.

In Summary

Keep good records and seek professional advice to navigate these new rules effectively.

 

Please note this article is for information purposes and does not constitute advice. Details correct at time of publishing.